Cost ch 3 : Scrap ,Spoiled Goods and Defective Work:

 Manufacturing operations usually produce some imperfect

units that can-not be sold as regular items.
 The controls over imperfect items and operations that waste
materials are important elements of inventory control.
1.Scrap materials: ‫ﻧﺸﺎرة اﻟﺨﺸﺐ‬
 may result naturally from the production process.
 The procedures to use in accounting for scrap are
determined by the expected sales value of the scrap.
 When the scrap value is small, no entry is made for it until
the scrap is sold, at which time the following journal entry
would be made:
Cash (or Accounts Receivable) 200
Scrap Revenue. 200
 The revenue from scrap sales is usually reported as Other
Income in the income statement.
 If the accountant chooses to treat the revenue from scrap
as a reduction in manufacturing costs, rather than as "Other
Income," Work in Process and the individual job in the job
cost ledger may be credited if the scrap can be readily
identified with a specific job.
 If the scrap cannot be identified with a specific job,
Factory Overhead may be credited
 When the value of the scrap is relatively high, an inventory
file should be prepared and the scrap transferred to a
controlled materials storage area.
 If both the quantity and the market value of the scrap are
known, the following journal entries are made to record the
inventory and the subsequent sale:
1. Transferred scrap to inventory :
Scrap Materiale. 300
Scrap Revenue (or Work in Process or Factory
Overhead) 300
2. Sold scrap at inventoried market :
Cash (or Accounts Receivable) 300
Scrap Materials. 300
2.Spoiled work : ‫ﻗﻄﻊ ﻏﻴﺎراﻟﻤﻮﺑﻴﻞ‬
 is an unexpected by-product of the production of the
primary product.
 Spoiled or defective goods are not by-products but
imperfect units of the primary product.
 Spoiled units have imperfections that cannot be
economically corrected. They are sold as items of
inferior quality or "seconds."
 The loss associated with spoiled goods may be treated
as part of the cost of the job or department that
produced the spoiled units, or the loss may be charged
to Factory Overhead and allocated among all jobs or
departments.

 Generally, Factory Overhead is charged unless the loss

results from a special order and the spoilage is due to
the type of work required on that particular order.
 In both cases, the spoiled goods are recorded in
Spoiled Goods Inventory at the expected sales price.
To illustrate, assume a garment manufacturer using job order
costing completes an order for 1,000 jackets (Job 350) at the
following unit costs:
Materials 20 , Labor 20 , Factory overhead 10
Total cost per unit= 20 + 20 +10 = 50
The journal entry to record the costs of production is as follows:
Work in Process (Job 350) 50,000
Materials. 50×20. 20,000
Payroll fo labor 50×20. 20,000
Factory Overhead. 50×10. 10,000
During the final inspection, 50 jackets are found to be inferior and are
Overhead, the following entry is recorded:classified as irregulars or
seconds. They are expected to sell for $10 each.

1.If the unrecovered costs of spoilage are to be charged to

Factory
Spoiled Goods Inventory. 50×10. 500
Factory Overhead. 40×10. 2000
Work in Process (Job 350) 2,500
2. If the loss from spoilage is caused by the unique production
requirements follows: of Job 350.
Spoiled Goods Inventory. 50×10. 500
Work in Process (Job 350) 500
3.Defective Work ‫ﺟﺎﻛﻴﺖ‬
 The procedures used in recording the cost of defective work are
similar to those employed in accounting for spoiled goods.
 There are, however, additional costs for correcting the imperfections
in defective units.
1. If these costs are incurred on orders that the company regularly
produces, they are charged to Factory Overhead,
2. For special orders, the additional costs are charged to the
specific job on which the defective work occurs.
 An inventory account is not established for goods classified as
defective because the defects are corrected and the units become
first-quality merchandise.
 Defective units have imperfections considered correctable because
the increase in market value by correcting the unit exceeds the cost
to correct it.
As in the previous illustration, assume that it costs $50 to
manufacture each jacket. Upon final inspection of the 1,000
jackets completed ,50 jackets are defective.
The costs of correcting the defect on the 50 jackets are$500 for
materials, $400 for labor, and $300 for factory overhead
representing a total cost of $1,200.
1. If the additional costs are charged to Factory Overhead
Factory Overhead. 1200
Materials. 500
Payroll. 400
Factory Overhead. 300

2. If the order for 1,000 jackets was a special order and the
defects resulted from the exacting specifications of the
order.
Work in Process ( job 350) 1200
Materials. 500
Payroll. 400
Factory Overhead. 300

 In this instance, the total cost of Job 350 will be higher

because the additional costs to correct the defects were
charged to the order rather than to the factory overhead
account.
 The unit cost of each completed increased from $50
($50,000/1,000)
 to $51,20 jacket is increased ($51,200/1,000) because of
the additional costs charged to the work in process account.